Tuesday, 1 February 2011

Desperate Markets; Football Transfers

As Capitalists, we are strong believers that markets work to improve economic interactions in almost every sphere. However, the power of markets too is that they are irrational as they are governed in the end by Humans and not the other way around. Politicians will cite fear of the markets and other such stuff when they need to, but the reality is that markets are really governed by human psychology.

By way of example, when the the UK was in recession the FTSE dropped to incredible lows, despite its constituents suffering (apart from the Banks) only mild distress, at times of strong positive psychology we get asset bubbles and the dot com boom.

In the UK, super rich Roman Abramovich decided his beloved Chelsea were in need of a refresh and spent £50 million on a Spanish Superstar who has not shined since injuries caught up with him and another expensive Portuguese player. Liverpool, owned by supposedly canny Americans, took this cash and spent all of it immediately and more; and on not one, but two replacements for Torres. One being Andy Carroll, a young English man famed as much for drinking and fighting as much as for his success (which is limited) on the pitch.

The power of fear, fear of not qualifying for the Champions League and fear of Manchester City's rich Sheikh's, drove these clubs mad. None of the players was worth the kind of UK record fees being paid; but in a tight market and with high pressure, poor decisions get made by supposedly clever people. They made these mistakes despite there being a litany of evidence suggesting that January transfers do not work out.

17 comments:

presumably the activity is driven by all the participants who receive money off the back of the deals simply taking place (agents etc on commission).

I suspect there many/most participants in this market are incentivised simply to make as many deals as possibly: it doesn't really matter whether the deals are 'good' or 'bad'. It's like an investment manager churning his portfolio for the transaction fees.

further to what Botogol said, things are getting even murkier (and costlier) with 3rd party sell on fees and even managers getting a slice of the action. take Ian Holloway, surely he has a conflict of interest in selling Charlie Adam. arguably his best performer and integral to them staying in the premiership, yet he will get a piece when someone offers enough.

SW - Putin won't go after Abramovich's money, it's his too. All the money they have collectively belongs to Yeltsin's daughter - only when people like Khordokovsy step out of line and try to use it for political purposes against the cabal does something happen.

Given that markets in financial instruments can also overprice assets and are subject to irrationality - I find it somewhat surprising that you find it worth commenting on the same phenomenon in the market for footballers. I know which unregulated market has cost the public purse more in recent times.

For those in any doubts about the relatonship between Abramovitch and Putin - please see the extract from Wikipedia below. What it doesn't state are the tax benefits Abramovict has gained from placing his business interests in Chukotka (that bit of Russia opposite Alaska - but which can be governed from his home in England).

Apparently the English FA have a fit and proper test for owners of English football clubs.

Abramovich was the governor of Chukotka from 2000 to 2008. It has been estimated that he spent over US$1.3 billion (€925 million) of his own money on the region,[33] which now has one of the highest birth rates in Russia.[34] Under Abramovich, living standards improved, schools and housing were restored and new investors were being drawn to the region.[35]

Abramovich said that he would not run for governor again after his term of office expired in 2005, as it is "too expensive", and he rarely visits the region. However, Russian President Vladimir Putin changed the law to abolish elections for regional governors, and on 21 October 2005 Abramovich was reappointed governor for another term.

Abramovich was awarded the Order of Honour for his "huge contribution to the economic development of the autonomous district [of Chukotka]", by a decree signed by the President of Russia.

Nothing wrong with saying markets get it wrong sometimes TBNGU; as noted the factors that cause the irrationality are to blame. In this case it is billionaires at play, in the finance markets it is often a failure of regulation.

I canny get me wee heed around it. I was alright(ish) about it when it was on a parity with Hollywood but the model just seems fucked. Now I like a vanity project as much as the next man but just pissing money down the drain seems strange with loss making on this scale. Just what, where, why, how the incentive? Hmm.

I don't think it is just agents who are incentivised to maximise the number of deals.. any deal will do. I suspect managers, players, scouts, advisors, all of them are rewarded just by making deals.

The M&A market is probably comparable. There's no money in saying don't do it.

"For one thing, investment bankers are pretty good salespeople, and we will use our sales wiles on our own clients when we think it's necessary. Accordingly, we will try to overcome any objections (like price, terms, etc.) a client may come up with that may stand in the way of closing a deal. For another, investment bankers are highly motivated to close deals, because in almost every instance that's the only way we get paid. A client should never hire an investment banker for pure, unbiased advice as to whether it should do a deal, because often the right answer to that question is no, and that's just not what we're selling"

TBNGU, markets are rational all the time. Human beings are not always, big difference. Not only that, but real FREE markets are extremely rare so it is arguable that unintended consequences created by "well meaning" people are really where irrationality starts from.

In this particular case, it is a transfer window, ie there is a limited time to buy or sell. Coupled with all the vested interest described above, it cannot be remotely described as a free market, so its irrationality is not particularly surprising.

Football isn't really a conventional business at all. As I wrote a while back :

"In any other business, the consumer buys the best they can afford. If a company goes under, they'll buy elsewhere. I haven't seen a Pye Radio or Riley car since I was a kid, but the owners of said items didn't stop buying radios and cars when the brands died.

It's not quite like that in football. When Wimbledon FC, who I watched in their glory days when I lived in South London, were sold to Milton Keynes and rebranded as MK Dons, their fans didn't go to Fulham or Chelsea. They restarted the club in Wimbledon.

Brand loyalty is everything. All 12 of the Football League's founding clubs from 1888 are still in existence. I don't have the details (bet Tim Worstall knows), but I'll bet that not one of the top 12 quoted companies from 1888 is still in the FT100.

Competition is the other difference. A company likes to eliminate competition if it can. Football clubs have to have someone to play against. They have to be of a reasonably high standard. It would profit Microsoft if all the other software developers in the world packed up. United would look pretty silly in a league of one."

Markets in themselves are nothing - they are only made up of humans or computer programmes set up by humans. It is not irrationality that leads to imperfect markets - but differences in access and information flows also contribute.

I don't deny that the football transfer market is imperfect - I was just making the point that so are many other markets. I'm afraid I just don't buy the analysis that the biggest and mostly costly market failure of recent time, i.e for collateralised debt was due to the the intervention of well meaning people.